Some Luxembourg employers choose to set up a supplementary pension scheme (the 'second pillar' of pension insurance) for all of their employees or for only one category of their employees. By doing so, employers can grant their employees benefits intended to supplement those of the legal social security schemes for retirement, death, disability or survival.
Employers can choose between financing the supplementary pension scheme internally—through provisions on the liability side of the employer's balance sheet—or externally—by paying premiums to an insurance company or a pension fund—as part of a defined benefit plan or a defined contribution plan. Employees can make personal contribution payments to the supplementary pension scheme put in place by their employer, if permitted under the terms of the scheme.
Who is concerned
This applies to any person:
- be they a resident or non-resident, who is or has been an employee in Luxembourg;
- who receives benefits paid under a supplementary pension scheme (as defined by the Law of 8 June 1999) implemented by their former Luxembourg employer.
How to proceed
Flat-rate tax withholding borne by employer
From a tax point of view, all provisions, insurance premiums, and contributions for the purpose of financing a supplementary pension scheme are taxable as benefits-in-kind from paid employment. These benefits are taxed at a flat rate of 20 %, withheld at source and borne by the employer.
This taxation is final for employees. As such, employees are not required to report these contributions or the tax withholding borne by the employer in their income tax return.
Deduction ceiling for personal contributions
Employees' personal contributions to an employer-sponsored supplementary pension scheme are tax deductible as special expenses up to EUR 1200 per year. Employees' personal contributions may be withheld from their net salary and deducted in the maximum amount EUR 1,200 as part of the taxes withheld from salaries by the employer. These contributions are to be reported in box 1435 of the income tax return form.
Resident taxpayers who receive benefits paid under an employer-sponsored supplementary pension scheme, as defined by the Law of 8 June 1999, have no tax obligations to discharge since these benefits are not taxable.
Indeed, upon leaving the scheme, supplementary pension benefits in the form of a life annuity or lump-sum capital payment, are fully exempt from income tax. This exemption is explained by the fact that all contributions to the supplementary pension scheme were taxed a flat-rate tax of 20 % when paid.
Benefits received by non-resident taxpayers under a Luxembourg employer-sponsored supplementary pension scheme, as defined by the Law of 8 June 1999, are not taxed in Luxembourg. However, such benefits are, in theory, taxable in the taxpayer's country of residence.
Nonetheless, the amendment to the double taxation agreement between Luxembourg and Belgium provides that benefits paid under a Luxembourg supplementary pension scheme are not taxable in Belgium for Belgian-resident taxpayers insofar that the contributions paid by the employer had already been taxed in Luxembourg.
Maintenance or transfer of acquired rights
If an employee leaves their employment before retirement age, all of the rights they acquired under the supplementary pension scheme implemented by their employer must be maintained, even in the case of dismissal for serious misconduct.
These acquired rights in the former employer's supplementary pension plan may be maintained until the employee's retirement.
These acquired rights may be transferred to another supplementary pension scheme in another company or another group of companies, or to a duly authorised external pension scheme (pension fund, insurance company).
They may also be repurchased in the following circumstances:
- the employee leaves to join a company located outside of Luxembourg;
- the employee has reached 50 years of age at the time of their departure;
- the retirement benefits paid in the form of a pension do not exceed one tenth of the monthly social minimum wage for a non-qualified worker of at least 18 years of age.
- the retirement benefits paid in the form of a lump-sum capital payment do not exceed 10 times the monthly social minimum wage for a non-qualified worker of at least 18 years of age.